Thematic and Sectoral Funds Mirror Pre-2008 Crisis Patterns, Warns Elara Capital:

A recent note by Elara Capital has drawn attention to rising concerns in India’s mutual fund landscape. The firm has compared the current enthusiasm in thematic and sectoral mutual funds to the speculative build-ups seen before the dot-com crash and the 2008 global financial crisis.

The report, titled Domestic Liquidity Tracker, points to the rapidly increasing Assets Under Management (AUM) in these categories as signs of excessive market optimism and speculative behavior.

Inflated Valuations and Market Distortions

According to Elara, concentrated buying by thematic and sectoral funds has led to inflated valuations in specific stocks and sectors. This trend is causing both direct and indirect distortions in the broader market, making price discovery more difficult.

Notably, the AUM of thematic and sectoral funds as a share of India's total market capitalization is now higher than it was during the peak of the 2008-09 financial crisis.

Echoes of Past Crises

Historical patterns show that major fund inflows into these segments occurred 6 to 9 months before the collapse of global markets in 2008. Elara warns that a similar trajectory appears to be unfolding in the present scenario.

Currently, around 19% of thematic and sectoral schemes have declined by over 10%. While such corrections were also seen in 2016 and 2020, investor sentiment today remains “exuberant,” a contrast to earlier cycles.

Possible Market Correction Ahead?

Elara draws parallels with the 2008 cycle. In March of that year, thematic funds suffered sharp losses. A brief market recovery followed, but by May 2008, another steep downturn had taken hold. The report warns that today’s markets are exhibiting similar signs, suggesting a potential repeat of this pattern.

Additionally, the firm highlights that in the past, closure of such schemes only began in 2011—three years after initial warning signs appeared.